The definition of a corporation is an organized form of business in which the ownership of the business is held by stockholders, or shareholders-individuals who have purchased ownership shares in the business. The corporation is organized with a board of directors and officers. The board of directors is elected to make the business decisions that affect the overall business condition and financial health of the business. Officers are elected to oversee the day-to-day operations of the business.

The advantages of operating a business as an S Corporation are first, that your liability is limited, second, it is a perpetual legal entity, and third, the S corporation can raise money by selling shares of stock to corporate investors. What does all this really mean? The limited liability aspect works in this manner: you are only liable to the extent of your investment. If you've only invested $5000 in a business, you are only liable for the value of the investment or $5000. The fact that a corporation is a legal entity and is perpetual means that even if one officer, board director, or shareholder should die, the business continues, often quite successfully. The ability to raise money is perhaps one of the best advantages. Many times, a business will need to increase cash flow, or fund the purchase of new equipment; if you can sell shares in the business, you have a built in way to fund those needs.

There are however certain qualification requirements for an S Corporation; they are as follows: the corporation must be a domestic corporation; the corporation must not be a member of an affiliated group of corporations; the shareholders of the corporation must be individuals, estates, or certain trusts. Partnerships and nonqualifying trusts cannot be shareholders. Under certain circumstances, corporations can be shareholders; the corporation must have seventy-five or fewer shareholders; the corporation must have only one class of stock, although not all shareholders need to have the same voting rights, and no shareholder of the corporation may be a nonresident alien. Although these may seem like difficult requirements to meet, they really are not. Most of them are taken for granted by many business owners in their attempt to form a corporation, so commonplace are the requirements. The only requirement that is today posing a problem is the requirement that all shareholders be citizens, not nonresident aliens. This interprets into a problem if say, a European investor wants to buy stock in an S corporation, and it currently is not permitted. However, as we operate on a more global basis, we may see a change in this requirement.

The disadvantages to the S corporation lie in the restriction on the number of shareholders and the fact that the corporation must not be a member of an affiliated group of corporations. Sometimes, the S corporation grows to the point that more than seventy-five shareholders is a feasible reality, and the corporation could be bought as a subsidiary, except that this changes the S Corporation status; it must now re-organize its legal entity status.

In forming a corporation, there are some legal requirements that must be met, before a corporation is legally recognized in the state it has chosen as it's state of incorporation; a name must be reserved and approved, articles of incorporation must be filed with the state and with your county clerk's office, and board members, officers, and stockholder shares must be completed. Once the corporation is organized, then the Board of Directors will put together the Bylaws that will govern many of the actions that the Board may execute, and what is expected from the officers, and the day-to-day operations of the business.

Tony Robinson is a Webmaster and International Author. Visit http://www.tax-portal.com/ for his tax tips.